There are plenty of worthy ideas floating around about ways to improve the economics of the cattle business, and it’s hard to choose which one is most important. According to the National Grazing Lands Coalition, the business of understanding the concept of margin is critically important to improving our economic outcome. The formula really is pretty simple: Sale price minus direct cost equals margin.
We could spend an entire article dissecting the different “costs” associated with running the ranch, but for the purposes of this discussion, let’s simply try to agree that it costs a certain amount of money to support a cow and her calf for a year. These costs fall into two categories: direct costs and overheads.
Direct costs: Inputs we spend on the cow herd (things like hay, minerals, medications, etc.)
If you add another cow to the herd, what costs go up? Those costs are direct costs.
Overhead: Costs related to land, labor and management. Adding another cow probably won’t mean hiring another employee or buying another tractor. And it won’t change your mortgage or land taxes.
When we add up all of our sales for the year (sale price) and deduct the amount we spent on taking care of the cows (direct costs), we are left with the margin. The margin is the amount of money we have available to pay for our overhead.
Some folks out there are probably thinking that this analysis is unnecessary; a cost is a cost. The only thing that matters is how much money is left in the checking account at the end of the year. But here’s the real bottom line: In order to recognize where you need to make improvement in your economic model, you need to be able to identify where you are spending your money, which enterprises are working and which ones aren’t. Identifying direct costs allows you to calculate margin for each enterprise, and knowing your margin tells you if you can afford to pay for the ranch overhead. If you can’t do that, you need to make a change to the enterprise, in order to improve the margin or – and this is generally more difficult – make a radical change to the overhead structure of the ranch, for example, get rid of land, your mortgage, your help, etc.
A farmer’s real payday comes when he or she is able to take the “leftover” money from a sale and use it to pay the mortgage. If you don’t have any leftover money (margin), you won’t be living on that property for much longer. And even though bigger calves might bring a higher sale price, they may actually bring the ranch a lower margin.